December 18, 2012

Estonia, Russia and the merits of expansionary austerity

The always-interestingBeyond BRICS blog over at the FT recently featured a post about Estonia that I had meant to write about earlier but, due to professional obligations, was unable to. It was a relatively brief entry which suggested that Estonia’s relatively successful experiment with austerity (its GDP is going to grow by about 3% this year) shows that Paul Krugman and other Keynesians are wrong to dismiss it. More broadly, the post tried to suggest that it’s possible to combine extremely conservative fiscal policy with sustained economic growth. This austerity versus stimulus debate has already gone on for awhile, I even weighed in on the subject, and it’s one that’s probably not going to be resolved any time soon: it crosses far too many ideological and emotional lines to be quickly resolved.

As my very minor contribution to the debate, I thought it would be valuable to quickly compare Estonia’s post-crisis recovery to Russia‘s. Why? Well partially because , at the name might suggest, this is a Russia-focused blog and I write a lot about Russia. But while pro and anti-austerity partisans each have their bete noires and their shining examples, virtually none of the mainstream economic commentators ever mention Russia when discussing post-crisis recovery. You get endless analyses of how Ireland and Estonia show that austerity works, and equally endless discussions of how the UK and Spain show that austerity is terrible, but no one even sees fit to mention Russia.

Why is Russia so absent from a debate that, by rights, it ought to be an important component of? To a large extent I think this is because it just doesn’t fit very neatly into anyone’s analysis. Since the onset of the financial crisis Russia has done some things (like increasing government spending) that are recommended from a Keynesian perspective but its done others (like increasing interest rates earlier this year) that are straight from the Chicago handbook and that would make people on the left side of the debate cringe. There’s also the small matter of Russia’s less than stellar record on human rights and its just slightly less than democratic political system, both of which make people far more careful of touting its performance or being seen as defending it.

Now the practical, policy-related lessons that can be drawn from this, I think, are relatively modest. Estonia and Russia are very different countries with very different economic structures. Estonia is an extremely small, extremely open, and extremely liberal economy, while Russia is a very large, not very open, and not very liberal one: you can’t simply export economic policy from one to the other and expect to receive similar results. However on a larger scale I think there are some more meaningful lessons, and they are as follows: if Estonia is really the best example that austerity defenders can come up with, then either 1) they need to urgently come up with a better example or 2) their preferred policy is a failure. Estonia has substantially under-performed a chronically noncompetitive and resource-dependent behemoth that, in large sections of the mainstream press, essentially functions as a by-word for primitiveness and corruption. And almost all of the defenses that austerity supporters use to defend Estonia (it was growing too quickly before the crisis! there was a giant bubble! the currency was overvalued!) are at least as applicable to Russia, if not more so.

The Estonian government has basically decided that its most urgent priority is to get its debt/GDP ratio to the lowest possible level, and that everything else (growth, unemployment, etc.) can be sacrificed in pursuit of this goal. That is entirely Estonia’s decision to make, and it’s a decision that has been repeatedly endorsed by the Estonian people. But while I can understand, and even sympathize with, Estonia’s decision making, I think it’s perfectly fair to note that other countries shouldn’t have to abide by the same calculus and that the much-hyped “Estonian boom” isn’t really a boom at all since Estonia still hasn’t regained its pre-crisis level of economic activity.

Mark Adomanis

* For 2012 I used estimates of 3% real growth in Estonia and 3.5% real growth in Russia.